Measuring fiscal impetus: the Great Recession in historical context.
McGranahan, Leslie ; Berman, Jacob
Introduction and summary
Fiscal policy describes how the expenditure and revenue decisions
of local, state, or federal governments influence economic growth. In
this article, we create a comprehensive measure of fiscal policy called
fiscal impetus, which estimates the combined effect of purchases, taxes,
and transfers across all levels of government on growth. Our goal is to
use this measure of fiscal impetus to examine how fiscal policy has
behaved during business cycles in the past, how it responded to the most
recent recession, and how it is likely to evolve over the next several
years. Our analysis reveals that policy was more expansionary than
average during the 2007 recession and has been significantly more
contractionary than average during the recovery. By the end of 2012,
fiscal impetus was below its historical business cycle average and it is
forecast to remain depressed well into the future.
Research on fiscal policy typically attempts to measure how a
change in tax or spending policies impacts economic outcomes. For
example, studies tend to focus on narrow questions such as how a change
in eligibility for a safety net program affects unemployment or how
infrastructure spending affects gross domestic product (GDP). While
there is a vast literature examining the effectiveness of particular
fiscal policies, relatively little attention has been devoted to
measuring the total contribution of all fiscal policies.
Perhaps the simplest indicator of the stance of overall fiscal
policy is the budget deficit. A deficit indicates that government
expenditures exceed revenues, a difference that must be financed by
borrowing. Assuming that government borrowing does not crowd out private
investment, a deficit is stimulative. It means the government is
directly purchasing or transferring more than it is bringing in through
taxes. Tax cuts and transfers lead to higher private consumption and
investment, while direct purchases lead to higher public consumption and
investment. However, focusing only on the deficit fails to account for
the fact that different fiscal policies may affect economic growth
differently. For example, a given level of spending on foreign aid or
domestic investment will have the same effect on the budget deficit,
though the latter may be more likely to stimulate domestic economic
growth.
An alternate approach to measuring the stance of fiscal policy is
to use statistical techniques to measure fiscal variables relative to a
benchmark or historical norm. Lucking and Wilson (2013) do this by
regressing federal taxes, spending, and primary deficits on lags of the
Congressional Budget Office (CBO) estimate of potential output. By
identifying the historical relationship between federal fiscal policy
and the output gap (the difference between potential and current
output), they create a baseline against which recent policy can be
compared. They argue that federal fiscal policy has been a modest drag
on economic growth during the recovery from the Great Recession--because
fiscal variables have been less expansionary than would be expected
based on the magnitude of the output gap-and that it will continue to be
a modest drag.
Many research organizations, such as the International Monetary
Fund (Bornhorst et al., 2011) and the CBO (2013a) have divided fiscal
policy into structural and temporary/cyclical components. The temporary
components aim to measure changes that are direct responses to the
business cycle; they can also include the effects of changing asset
prices or temporary budget items. Any automatic stabilizers triggered by
the tax code or benefit systems are counted as cyclical, while
discretionary fiscal policy is counted as structural. Other authors have
relied on large-scale econometric models to estimate the effects of
policies. These models look at historical data and try to find
statistical relationships between changes in fiscal variables and
changes in output. For example, Follette and Lutz (2010) apply fiscal
multipliers to a variety of policy factors and estimate their aggregate
effects using the FRB/US model developed by staff of the Board of
Governors of the Federal Reserve System.
In this exercise, we refrain from measuring the stance of fiscal
policy using econometric techniques and instead focus on developing a
simple method to measure fiscal impetus that allows us to compare
historical data from the National Income and Product Accounts (NIPAs),
produced by the U.S. Bureau of Economic Analysis (BEA), across time in a
meaningful and consistent way. Our approach has several strengths.
First, it is comprehensive. Since our method only requires data from the
national accounts, it can easily include all sectors of government.
While federal fiscal policy attracts significant attention, state and
local policy is often ignored. State and local governments account for
45 percent of all government receipts, and nearly 40 percent of
expenditures, so it is necessary to include these sectors in any measure
of overall fiscal stance. The national accounts data are also extremely
detailed, making it easy to identify the sources of strength and
weakness within subcategories. For example, within the national defense
consumption expenditures category, we can see exactly how much
ammunition purchases contributed to fiscal impetus.
Second, our method does not require us to disentangle structural
policy changes (active policy changes such as new direct spending) from
automatic stabilizers and other cyclical changes (passive changes caused
by the business cycle). Although this distinction is useful for other
types of analysis, classifying the source of impetus as active or
passive should have no relationship to a measure of its scale. (1)
Additionally, separating the two forms of impetus can be challenging and
imperfect (Weidner and Williams, 2014). Absent a measure of the output
gap, we are not saying anything about the level of fiscal impetus
relative to the decline or recovery of economic activity. Instead, our
goal is simply to report what happened. Because our measure does not
require a complex model, it can be easily updated and modified.
Our exercise makes assumptions about how fiscal policies affect
contemporaneous output, but we make no attempt to test those
assumptions. Specifically, we will use multipliers estimated by the CBO
to weight the impact of different types of policy. Rigorously measuring
these multipliers requires either a statistical argument that identifies
some exogenous policy variation or a dynamic equilibrium model that can
account for the various channels through which fiscal policy is likely
to affect the economy. For example, more formal models can account for
how a shock in government spending is likely to affect interest rates,
inflation, productivity, incentives to work, or expectations of future
taxes. Instead of referring to this large (and often controversial)
literature, we take the CBO multipliers as given and ask what they imply
about the stance of fiscal policy more broadly.
Detailed measurement
In this section, we develop the measure of fiscal impetus that we
use throughout the remainder of the article. Our goal is to have a
measure of fiscal impetus that is the sum of fiscal impetus arising from
different sources (taxes and transfers, federal and state) that is
conceptually similar to the concept of the contributions to real GDP
percentage change as measured in the NIPAs (table 1.1.2) with the
modification that we adjust for population growth. (2)
Let nominal output at time t be denoted by [y.sub.t], and let
[x.sub.i,t] be the nominal value of a particular component of fiscal
policy indexed by i at time t. The percent contribution is approximated
as the percent change in a component of fiscal policy multiplied by its
ratio to total output in the previous period, t-1. This is expressed as:
[x.sub.i,t-1]/[y.sub.t-1]([[x.sub.i,t]/[x.sub.i,t-1]] - 1).
To get the contribution in real per capita terms, we divide all
nominal terms by an appropriate price deflator, [p.sub.t], and the
population, [n.sub.t]. Finally, we sum across each form of impetus to
get the following measure of total fiscal impetus:
2) [[summation].sub.i][ [x.sub.i,t-1]/[y.sub.t-1]]
([[x.sub.i,t][p.sub.t-1][n.sub.t-1]/[x.sub.i,t-1][p.sub.t][n.sub.t]] -
1)
Note that when we set [x.sub.i,t] to government purchases and
assume no population growth, the measure is nearly identical to the
BEA's official calculation of the government contribution to
percent change in real GDP published in NIPA table 1.1.2. (3) We do not
include any lags in our equation, so we are measuring impetus as a share
of contemporaneous GDP. The effects on actual growth may be more drawn
out.
Data
Our three impetus categories are purchases, taxes, and transfer
payments at both the federal and state and local levels. Our purchases
category includes all purchases of goods and services included in
government consumption expenditures and gross investment in the NIPAs.
Since governments produce nonmarket services, the BEA uses the cost of
inputs to impute the market value of government production. At the
federal level, defense-related activities account for nearly two-thirds
of all purchases; the major nondefense categories include health
research, health care services provided to veterans, tax collection and
financial management, federal policing activities, and the
administration of social insurance programs. On the state and local
level, the single largest category is primary and secondary education;
others include highway construction, police and fire services, higher
education, and community services.
Our second category of fiscal impetus is tax revenues. Tax revenues
enter our measure of fiscal impetus negatively because higher taxes
reduce consumption. Our data come from NIPA table 3.1 and are personal
current taxes (the income tax and the capital gains tax), taxes on
production and imports (property, sales, and excise taxes), and
contributions for government social insurance (employer and employee
contributions to Social Security, Medicare, and unemployment insurance
trust funds). During periods of economic slack, labor tax revenue falls
automatically as households have less taxable income and shift into
brackets with lower marginal tax rates. Additionally, in an effort to
raise disposable income and stimulate private demand, governments often
respond to downturns by cutting statutory rates or expanding credits and
deductions. Though property and sales taxes are less sensitive to
business cycles, revenue collections also tend to slow when the economy
is depressed.
The final type of impetus in our model is transfer payments as
recorded in NIPA table 3.12U. As with taxes, changes in the level of
transfers happen automatically as incomes fall or through policy changes
that expand eligibility. Transfer payments stimulate private demand by
making more resources available to households for consumption. Transfers
can be either cash payments, such as Social Security benefits, or
in-kind transfers such as food stamps--an important distinction between
the two is that in-kind benefits cannot be saved.
To convert values into real terms, we use the relevant NIPA
implicit price deflator. For taxes and transfers, we use the personal
consumption deflator; and for government purchases, we use the
government consumption expenditures and gross investment deflator. Our
population sample is the total population of the United States as
reported in NIPA table 2.1. All growth rates are in real per capita,
seasonally adjusted, annualized terms.
Understanding fiscal impetus
Figure 1 plots our measure of total fiscal impetus and the annual
change in the total government deficit to GDP ratio. These are not
measured in per capita terms. Although these two measures both come from
the NIPAs, they are computed using different data and methods. The cash
deficit includes categories such as interest payments and income
receipts on assets that we do not include in our measure of fiscal
impetus since their impact on economic activity is ambiguous. The
mathematics behind both calculations are also different: The blue line
in the figure represents a growth rate, while the red line is the
difference between two ratios. Nevertheless, they tell broadly the same
story. Years in which the deficit/GDP ratio is growing are also years
when fiscal impetus is expansionary.
A problem with this unweighted fiscal impetus measure is that it
fails to account for the fact that different forms of fiscal impetus may
have different effects on economic activity. This is one of the reasons
we do not rely on the deficit as our impetus measure. To account for
this, we apply weights or "multipliers," denoted as w. , to
different sources of fiscal impetus before we aggregate across the
types. For example, if we would expect a tax cut for a low-income
household to be more likely to be spent than a tax cut for a high-income
household, we would assign a higher weight to low-income tax cuts (as
measured by cuts in the payroll tax). Our final impetus equation, then,
is expressed as:
3) [[summation].sub.i][w.sub.i]
[[x.sub.i,t-1]/[y.sub.t-1]]([[x.sub.i,t][p.sub.t-1][n.sub.t-1]/
[x.sub.i,t-1][p.sub.t][n.sub.t]] - 1).
[FIGURE 1 OMITTED]
We assign a multiplier of 1.5 to purchases, 1.25 to transfers, 0.8
to payroll taxes, and 0.4 to income, property, and sales taxes. We
choose these weights based on research by the Congressional Budget
Office. (4) As a simple robustness check, we perform all of our
calculations using a multiplier of one for all forms of impetus in the
appendix. In general, changes to the multipliers change the magnitude of
impetus, but not its overall shape over time. To show the effect of
weighting, figure 2 compares impetus without population adjustment
calculated using uniform weights versus our preferred weights. Our
preferred weights increase the mean of impetus over time, but decrease
its variance. Figure 3 shows annual fiscal impetus since 1960 using our
preferred multipliers in real per capita growth terms.
Fiscal impetus during the recession
We developed this measure of fiscal impetus to analyze fiscal
policy during business cycles. Throughout, we use the National Bureau of
Economic Research's business cycle dates to mark the beginning and
end of recessions. To better understand the dynamics of fiscal policy
during the 2007-09 recession, we compare the path of key variables for
the eight quarters following the 2007 peak with their path following
other business cycle peaks since 1960. Our sample of recessions includes
the recessions starting in 1960, 1969, 1973, 1981, 1990, and 2001. We
start in 1960 since this avoids the several short recessions in the
1950s, as well as the large distortionary effects of the Korean War. We
drop the first part of the double-dip recession starting in January of
1980. This approach provides a framework for understanding how fiscal
measures responded to the recession as it was happening. The
eight-quarter period covers the beginning of the recession in the fourth
quarter of 2007 through the fourth quarter of 2009.
[FIGURE 2 OMITTED]
Figure 4 compares fiscal policy during the Great Recession to the
average fiscal policy in our historical sample. We show the cumulative
impetus as of each quarter relative to the peak quarter. That is, we
compound each quarter's impetus to show the sum of all impetus
since the start of a recession. The faint lines in the background of the
figure represent each previous recession. Figure 5 shows cumulative
impetus decomposed into its component parts. The thick black line
represents the path of impetus during the average recession; any shaded
area above the black line is policy impetus since 2007 that was in
excess of the historical average, and any area below the line is policy
impetus below the historical average. The black line, plus the distance
above it, minus the distance below, yields the 2007 experience. A larger
area represents a larger deviation from average. For example, in figure
5, the fact that the green region is above the black line in the later
quarters but its area is relatively small indicates that the growth in
purchases during this recession was only slightly above average. (5)
At quarter 8, the red line in figure 4 is above all of the faint
lines, which indicates that fiscal policy during the Great Recession was
more expansionary than in any previous post-1960 episode. The first
major source of fiscal impetus came from the Economic Stimulus Act of
2008, which spent $113 billion on lump-sum, refundable tax rebates for
individuals making less than $75,000 and joint filers making less than
$150,000. The NIPAs record this partially as an offset to personal
current taxes and partially as a current transfer payment. The spike due
to this is clearly visible as expansionary tax and transfer policy in
the second quarter of 2008 (the second quarter after the peak). Policy
contracted in the following quarter as taxes and transfers returned to
their previous levels and then surged back up as automatic stabilizers
kicked in and Congress passed the American Recovery and Reinvestment Act
(ARRA). By the eighth quarter after the peak, impetus was solidly above
the previous historical high achieved during the 1973 recession.
[FIGURE 3 OMITTED]
As indicated in figure 5, the majority of excess stimulus came from
falling taxes and increasing transfers; purchases account for only 10
percent of stimulus above the historical average. On the tax side, a
sharp drop in effective tax rates and ARRA-related tax cuts drove
personal taxes well below historical levels. Payroll and production
taxes were also below average, although the size of the effect was
modest. On the transfer side, stimulus was more evenly distributed
across programs. A large portion of excess stimulus came from
unemployment insurance with other categories including refundable tax
credits, special payments to Social Security beneficiaries, and
increased food stamp benefits (Supplemental Nutrition Assistance
Program, or SNAP). Medicaid transfers did not rise above the historical
average. In the purchases category, nearly the entire excess stimulus
came from defense purchases. Nondefense purchases were only slightly
above average, and state and local government purchases were a
significant drag.
[FIGURE 4 OMITTED]
[FIGURE 5 OMITTED]
[FIGURE 6 OMITTED]
Fiscal impetus during the recovery
In this section, we repeat the calculations above, but instead plot
the relevant series starting at the business cycle trough and covering
the subsequent 18 quarters. This approach allows us to study the
dynamics of policy during the recovery. The period covers the beginning
of the recovery in the second quarter of 2009 all the way through the
fourth quarter of 2013. As indicated in figure 6, fiscal policy during
the recovery was significantly more contractionary than the historical
average. The net effect of policy in the quarters immediately after the
beginning of the recovery hovered around zero as opposed to the
historical average, which is slightly positive. Policy began contracting
around the fifth quarter and remained near the low end of our comparison
recoveries throughout most of the recovery. In the last several quarters
in the figure (representing late 2012 and 2013) it fell precipitously,
and by the end of 2013 it was well below the previous historical low of
the 1969 recovery.
Figure 7 divides the impetus contribution into its component parts
and shows that the tightening of fiscal policy was driven primarily by a
decline in direct government purchases. While purchases grew at a
slightly above-average rate during the recession, they shrank in almost
every quarter of the recovery. Purchases also grew slowly during the
recoveries of 1991 and 1975, but by 2012 the cumulative decline was
larger than in any prior historical period. The decline in purchases was
driven mostly by cuts by state and local governments. Figure 8
highlights that the contraction in state and local government purchases
far exceeded that of any previous historical episode. The contribution
of federal government purchases was also below average, though the
magnitude of the effect was less dramatic. In the nondefense sector, the
federal civilian work force declined to the smallest level since 1966
and intermediate purchases also fell considerably. However, given that
nondefense purchases are not a large part of the government sector, this
was only a modest drag. The cumulative effect of defense purchases
hovered near zero and then slowly drifted down around 2011--a trend
roughly in line with the historical average. Overall, about 70 percent
of the relative decline in purchases is explained by the state and local
sector.
[FIGURE 7 OMITTED]
Despite persistently high unemployment, transfer payments in this
recovery grew below the historical average. Per capita spending on
Social Security, Medicare, and Medicaid--which together account for
three-quarters of all government social benefits--was below average.
This is consistent with the record-low growth in national health
expenditures over the past several years. Unemployment insurance was a
relative drag, but it was declining from unusually high levels. Spending
on SNAP benefits was consistently higher than average; however, even at
its peak, SNAP accounted for only 3 percent of social benefits, so the
magnitude of the effect was small.
The relative drag from purchases and transfers during the recovery
was partially offset by tax policy. The net effect of tax policy
throughout most of the recovery was near zero, compared with the
negative historical average, which indicates that taxes usually
increase. The 2001 recovery was the only one in which tax policy was a
larger contribution to growth than in 2009. Almost the entire tax
stimulus came from the payroll tax cut of 2011, which cut the rate for
employee contributions from 6.2 percent to 4.2 percent. When Congress
allowed this legislation to expire in 2013, payroll revenues rose
sharply and by the end of 2013, tax policy had converged back to its
historical average. Personal current taxes (as opposed to payroll taxes)
were a relative drag throughout the recovery, while production taxes
made a modest positive contribution. A sharp increase in taxes combined
with declining purchases made the first quarter of 2013 (quarter 14 in
figure 6) the most contractionary quarter of fiscal policy since 1960.
Under our specification of the weights, the magnitude of drag in that
quarter was 4 percent of per capita GDP.
[FIGURE 8 OMITTED]
Fiscal impetus over the full business cycle
In this section, we repeat the calculations above for the entire
business cycle. This allows us to compare the size of the fiscal
expansion during the recession with the fiscal contraction during the
recovery. We are interested in assessing the extent to which the
unprecedented decline during the recovery offset the increase during the
recession. We start in the fourth quarter of 2007 and continue through
the fourth quarter of 2013. Figure 9 shows that relative to the
historical baseline, although fiscal policy was unusually expansionary
during the recession, the contraction in fiscal policy following the
recession was even larger. The cumulative contribution to growth of
fiscal policy was more stimulative than average up until the middle of
2012 when the red line crosses the blue line. By the end of 2013,
cumulative fiscal impetus was solidly below its historical average.
[FIGURE 9 OMITTED]
Figure 10 presents this information in a different way. We show the
data as growth rates for each quarter without cumulating over time. In
past business cycles, policy started as moderately expansionary, shifted
to neutral or slightly negative, and then returned to a modest positive
contribution about 15 quarters after the business cycle peak. During the
most recent episode, policy started as strongly expansionary, contracted
significantly, eased somewhat, and then contracted again. In table 1, we
report summary statistics for fiscal policy following each peak over the
quarters when real per capita GDP was below its pre-recession level.
This represents the business cycle period before the economy has
returned to trend growth. As a result, the number of quarters differs
for each recession. Changing the number of quarters under consideration
for a particular business cycle will tend to change the magnitude of the
averages, but the general trends are consistent across most sample
periods. Overall, we find that fiscal policy was less expansionary and
more volatile than average following the 2007 peak. Within our sample,
the 2007 business cycle had the smallest average impetus and the highest
standard deviation. Figure 11 confirms this graphically; namely that the
source of weakness was largely in the purchases category, which
subtracted an average 0.28 percent from growth instead of adding 0.37
percent as it typically has. Low purchases were partially offset by
expansionary tax policy and slightly above-average transfers. Within
purchases, the state and local government sector explains nearly the
entire decline; national defense was modestly above average, and
nondefense was roughly average.
[FIGURE 10 OMITTED]
Fiscal impetus from ARRA and payroll tax cut
As mentioned earlier, fiscal policy changes are often divided into
discretionary policy and automatic stabilizers. In this section, we
discuss some of the largest discretionary changes. Government on the
local, state, and federal level responded to the Great Recession with a
variety of discretionary fiscal policies. A full cataloging of these
policies is beyond the scope of this article, but there are two large
federal programs that merit special attention: the American Recovery and
Reinvestment Act (ARRA) passed in 2009 and the payroll tax holiday
passed in 2011. In supplemental tables, the BEA computes the effects of
these specific programs on selected government-sector transactions. By
applying these computations to our impetus formula, we can measure the
size of ARRA and the payroll tax cut relative to the residual policy
impetus (all impetus not due to these two policies). It is important to
emphasize that our model is static and will tend to produce different
results from econometric or general equilibrium methods used by other
researchers.
[FIGURE 11 OMITTED]
Figure 12 decomposes ARRA's effects on the government account
into its component parts. The data include only the effects of programs
over the period authorized in the original ARRA legislation; subsequent
extensions to programs that were initially part of the ARRA, such as
numerous unemployment insurance extensions, are not included in these
calculations and are part of the residual impetus. We start at the first
quarter of 2009 when the legislation was passed and end in the last
quarter of 2012 when nearly all the funds had been disbursed. Over this
period, ARRA increased net borrowing by an average of $194 billion per
year, or 1.3 percent of GDP. Most of the program consisted of transfer
payments and tax cuts. Direct federal government consumption purchases
accounted for only 5 percent of the total program.
For the payroll tax holiday, we investigate the entire period that
it was in effect--January 2011 to December 2012--even though there were
three separate pieces of legislation authorizing the program over that
period. The payroll tax holiday is simpler to analyze since the only
account affected was contributions for government social insurance.
Figure 13 combines the program-specific data with our policy
weights to show the sources of impetus during the Great Recession and
recovery. The figure begins at the business cycle peak in the first
quarter of 2008. The impetus from ARRA shows up immediately after the
legislation was passed. ARRA had its greatest impact in the second
quarter of 2009 when it contributed 5 percent to real per capita growth.
As ARRA-related funding declined, the program made negative
contributions to growth, the largest of which occurred in the first
quarter of 2011. This was purposefully offset by the payroll tax cut,
which first took effect that quarter and provided a growth impetus of
2.2 percent. All policy on the federal, state, and local level not
included in these two programs is defined as residual policy. We compute
residual policy simply by subtracting the effects of ARRA and the
payroll tax cut from the total impetus calculated earlier.
[FIGURE 12 OMITTED]
ARRA affected tax impetus primarily through credits to personal
current taxes: "Making Work Pay" provided a refundable tax
credit of up to $400 for individuals and up to $800 for couples; the
American Opportunity Tax Credit provided a credit to pay for higher
education expenses; the existing Earned Income Tax Credit and Child
Credit were expanded; and the floor for the alternative minimum tax was
reduced. Corporate income taxes were cut by a small amount, but we omit
this from the model since we do not include a multiplier concept for
corporate income taxes.
In the transfers sector, the majority of ARRA impetus came from
provisions affecting unemployment insurance. ARRA authorized the
extension of emergency benefits, provided federal funding for extended
benefits, loosened eligibility requirements, and increased monthly
benefits by $25 for all recipients. Additional ARRA impetus came from
SNAP, which expanded eligibility for childless adults and increased
benefits. by an average of $46 per month. Other transfer programs
included a one-time $250 payment to Social Security beneficiaries,
student financial assistance, limited assistance for housing and energy
expenses, and veterans' benefits.
[FIGURE 13 OMITTED]
ARRA impacted the purchases channel directly through funds that
were made available for specific federal programs and indirectly through
grants to state and local governments. Federal government purchases
consisted primarily of research grants to agencies such as the National
Institutes of Health and the Department of Energy, as well as some
infrastructure programs. Gross investment and capital transfers are
weighted the same as purchases. ARRA's effect on state and local
government purchases is difficult to measure since most funding was
provided through grants for Medicaid and education. Instead of
attempting to estimate counterfactual state spending, we simply apply
the CBO-estimated weight of 1.3 (CBO, 2013b).6 This is the same as
assuming that states and localities spent the majority of funds on
purchases, with a small percentage going to offset cuts in transfers or
tax hikes.
Forecasts of fiscal impetus
Given the abnormal path of fiscal impetus in recent years, a
natural question is whether impetus is likely to return to its
historical trend. We explore this question by applying our impetus
measure to forecasts of purchases, transfers, and taxes. Our forecast
comes from the CBO's baseline projection, which assumes that future
federal fiscal policy will evolve as prescribed by current law. One
advantage of using the CBO forecast is that the assumptions and policies
included in the forecast are transparent. Additionally, no major federal
tax or spending policies are set to expire in the near future, which
means that current law provides a reasonable estimate of what policies
are likely to occur. One disadvantage of the CBO forecast is that it
only covers federal fiscal policy and omits the state and local sector.
This means the results from the CBO forecast are not comparable with the
results in previous sections. Nevertheless, third-party forecasters show
a similar path for state and local fiscal policy, so we believe that the
general trends presented below are also a reasonable indication of
overall future impetus.
[FIGURE 14 OMITTED]
Figure 14 graphs federal fiscal impetus from 2006 to 2023. The
figure shows that federal fiscal impulse is expected to remain
contractionary from fiscal years 2014 to 2019. However, the magnitude of
the contraction is likely to be less than in recent years. In fiscal
year 2015, taxes and purchases provide a negative contribution of about
0.5 percent and 0.1 percent, respectively, partially offset by transfers
that are estimated to provide a 0.3 percent positive contribution. In
the next several years, the majority of fiscal drag comes from tax
policy, as the contribution of purchases hovers near zero. The positive
contribution of transfers is projected to edge up and bring the net
contribution of impetus into positive territory by 2020.
Fiscal policy during the Great Recession was more expansionary than
in the average post-1960 recession, with declines in taxes, increased in
transfers, and higher purchases all contributing to higher than typical
fiscal impetus. This pattern reversed itself following the cyclical
trough, with declining purchases, particularly among subnational
governments, accounting for most of the shortfall. By mid-2012,
cumulative fiscal impetus was below the average level in other post-1960
recessions. Although fiscal restraint is expected to ease somewhat over
the coming years, there is no indication that fiscal policy will be a
meaningful source of economic growth in the near future.
APPENDIX: CALCULATIONS USING A MULTIPLIER OF ONE FOR ALL FORMS OF
IMPETUS
[FIGURE A1 OMITTED]
[FIGURE A2 OMITTED]
[FIGURE A3 OMITTED]
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'How big is the output gap?,'" FRBSF Economic Letter,
Federal Reserve Bank of San Francisco, July 7, available at
www.frbsf.org/economic-research/ files/el2009-19-update.pdf.
NOTES
(1) An increase in transfer spending can happen automatically with
the business cycle or as part of a new discretionary program. In either
case, households have more transfers than they otherwise would and the
program would be expected to stimulate demand. Theory suggests that the
impact of a policy change is affected by whether it is expected to be
temporary or permanent. Although the discretionary/automatic distinction
is loosely related to expectations, it is difficult in practice to
reliably differentiate the two.
(2) We use per capita growth rates because it helps detrend the GDP
series over long time horizons. Also, to the extent that GDP growth is a
proxy for improving welfare, per capita GDP growth is the relevant
statistic.
(3) The BEA does not release data on the level necessary to
reproduce the figure exactly.
(4) These multipliers are also consistent with FRB/US, the
large-scale macroeconometric model used by the Board of Governors of the
Federal Reserve System. Throughout our exercise, we assume that there is
no monetary offset--monetary policy response to fiscal policy changes.
The central bank typically responds to changes in fiscal policy by
adjusting monetary policy to maintain an economy with stable inflation
and full employment. Since we are only interested in the fiscal side of
policymaking, we assume the central bank leaves monetary policy
unchanged.
(5) The shading is sometimes both positive and negative between
data points to preserve continuity. The areas do not overlap such that
any portion is ever "covered" by another. For example, if the
contribution to growth from purchases, taxes, and transfers, were,
respectively, positive 6 percent, negative 3 percent, and negative 3
percent, then the figure would appear with one large green area above
the thick black line, and two smaller, equally sized blue and red areas
below the thick black line.
(6) See www.cbo.gov/sites/default/files/cbofiles/attachments/
43945-ARRA.pdf.
Leslie McGranahan is a senior economist and research advisor and
Jacob Berman is an associate economist in the Economic Research
Department of the Federal Reserve Bank of Chicago.
TABLE 1
Average fiscal impetus over recession and recovery
Purchases Taxes Transfers Total fiscal impetus
Start of
recession Mean Mean Mean Mean Standard
deviation
1960 1.03 -0.06 0.76 1.73 1.24
1969 -1.12 0.31 1.23 0.42 1.64
1973 0.66 0.18 1.12 1.96 2.25
1981 0.58 0.10 0.68 1.35 1.27
1 990 -0.11 0.07 1.09 1.05 1.19
2001 1.05 0.17 1.19 2.41 0.81
Average 0.37 -0.25 0.48 0.60 1.82
(1960-2001)
2007 -0.28 0.04 0.56 0.32 3.10
